RBS and Barclays bounce as banks help lift FTSE 100 to a four month high

Banks were back in demand, helping push the FTSE 100 to a four month high, as some of the negativity surrounding the sector in recent days began to fade.

Investors took comfort from suggestions that new rules on capital requirements, expected to be agreed by European regulators and bank governors over the weekend if all goes according to plan, may not be as tough as first believed. The Basel III framework is forecast to set a 7% tier one capital ratio, including a buffer to help protect banks against any future extreme economic downturn. This is less than the 8%-9% some had been demanding, and less than the 10% maintained by most UK banks.

On top of that, the prospect of a break-up of the banks seemed to recede, while the Irish government's actions on Anglo Irish bank also helped sentiment. So Royal Bank of Scotland rose 2.32p to 48.15p while Barclays, whose private equity business may reportedly seek its independence, was 15.35p better at 323.35p.

Lloyds Banking Group added 2.35p to 74.67p as UBS issued a buy note on the bank with a 100p target and Barclays Capital raising its recommendation from underweight to equal-weight. The bank is also believed to have sold its stake in housebuilder Crest Nicholson for a reported £150m.

Overall the FTSE 100 finished 64.42 points higher at 5494.16, its best level since the end of April. The mood was helped by better than expected US jobs and trade data, which lifted Wall Street, while the poor UK trade figures and the Bank of England's decision to leave interest rates on hold had little impact.

Elsewhere the takeover talk surrounding Centrica refused to die away, with reheated suggestions of a possible bid from Russia's Gazprom doing the rounds at a supposed 480p a share. The company, which benefited earlier in the week from positive comments by both JP Morgan Cazenove and Nomura, closed 8.1p higher at 346.1p.

Arm maintained its recent good run, up another 15.5p to 403.2p as the chip designer unveiled a new processor which could take it further into the server market and vague bid speculation continued.

Miners were also wanted on hopes that an upturn in the global economy would boost demand for commodities. Xstrata climbed 36.5p to 1138.5p, additionally lifted by renewed talk of interest from its major shareholder Glencore, while Vedanta Resources rose 66p to £20.38.

Shire added 24p to £14.75 after the pharmaceutical group agreed to licence a treatment for duchenne muscular dystrophy from US biotechnology group Acceleron, giving a boost to its rare disease pipeline. Shire will pay an initial $45m with further payments of up to $165m if the drug is successfully commercialised.

But retailers were under pressure after their results. Home Retail, due to exit the FTSE 100 this month, fell 6.2p to 215.2p, while HMV dropped 7.25p to 59.25p, dragging Game Group down with it. Game, another loser from the latest index reshuffle since it will be demoted from the FTSE 250, lost 1.55p to 71.90p.

Vodafone dipped 0.35p to 159.45p despite announcing a restructuring which will leave its stakes in businesses like France's SFR - stakes investors are keen for the company to sell off - held outside its main subsidiaries. Its defeat in an Indian tax case this week helped sour sentiment a little.

Among the mid-caps Aveva dropped 78p to £14.02 as UBS cut its recommendation on the IT company from neutral to sell. The bank called the company "the most expensive software stock in our European universe" and said the current price seemed to be discounting 20% upgrades to profit forecasts. It added:

Aveva is a potential M&A take-out candidate. However we note that peer Intergraph was bought for 11 times historic earnings. Aveva is at 14.5 times on the same basis – seemingly already more than pricing-in the risk of a take-out.

Finally strong demand from Japan and Asia for its measuring and calibration equipment has boosted sales at precision engineering group
Renishaw. The company's shares jumped 127p to £10.04 and Altium Securities raised its target price from 938p to £12.49. Analyst Steve Medlicott said:

Renishaw has issued a very brief trading update stating that turnover in the first two months of the new financial year has been approximately £20m per month and that the order book stands at £25m with order visibility of four to five weeks. The strongest demand has come from Japan and the rest of Asia where sales are running at double the same period last year.

Prior to this update we had been forecasting £215m of turnover implying an average monthly rate of £17.9m. This update suggests a level of trading materially ahead of our previous expectations.

This is a world class business that is benefitting from underlying strong demand and a combination of new launches and the integration of existing products into a range of customer machines. The strength of demand is particularly encouraging as it has been achieved whilst a number of the western markets continuing to trade below previous levels. The statement failed to refer to the healthcare side. This part of the group has suffered from a slow ramp up but if the group is successful in this area it has the scope to be larger than the metrology division over the next few years – the metrology division accounted for 100% of group earnings in the year to June 2010.